For Local Grocers, Understanding Customers Holds Key to Competing with the Wal-Marts

Tepper School of Business Research Provides In-Depth Analysis of Mega-Retailer Impact

Vishal Singh, assistant professor of marketing, was the lead author of "Impact of Wal-Mart Supercenter on a Traditional Supermarket," which will appear in Marketing Science.

PITTSBURGH—It's every local retailer's worst nightmare: a new mega-store is opening just up the street. But, new research from the Tepper School of Business at Carnegie Mellon University suggests that small businesses can compete effectively by using their existing customer data to develop new sales and marketing strategies. The research also identifies several key characteristics of customers that tend to switch to a mega-retailer, allowing local retailers to aggressively target those customers who are likely to defect.

Researchers analyzed customer behavior for a small-town supermarket on the East Coast for a period of 20 months, before and after a Wal-Mart Supercenter moved in two miles away. The study is one of the first to quantify the impact of a mega-retailer on a traditional grocery chain. When Wal-Mart opened, the local retailer lost more than 17 percent of sales volume, reflecting a $250,000 monthly decline in revenue.

What's in your basket?

Shoppers likely to defect to Wal-Mart are large-basket consumers who buy quantities of:

"We looked at customer data in the store's robust frequent shopper program," said Vishal Singh, assistant professor of marketing at the Tepper School and lead author. "The information captured more than 85 percent of transactions and represented more than 10,000 households." The data included products purchased, date and time of sales, and the geographic location of customer residence in relation to the store.

"We found that roughly 70 percent of the lost revenue was attributed to only 20 percent of the store's customers," said Singh. "We then looked to find out why customers defected and why some remained loyal. With this information, retailers can make decisions about the types of products they carry and how to better price and promote them."

By analyzing purchase behavior of customers who moved their purchases to the mega-retailer, the researchers determined that typical defectors tended to be "large basket" consumers who were likely to have an infant and pet in the family. In addition, likely defectors tended to shop more on weekends and frequently bought lower-priced store brands rather than name brands. Singh noted previous research has shown that store-brand buyers tend to be more price sensitive, reinforcing why they would move to a mega-retailer that has economies of scale in its favor.

In contrast, customers less likely to move purchases to the mega-retailer tended to spend a large proportion of grocery expenses on fresh produce, seafood and home meal replacement items such as salad bars or "ready-to-eat" food selections.

In addition, Singh discovered that geographic proximity to the local grocer had little impact on whether a customer was likely to defect. The study also found that the majority of losses at the local store were due to fewer store visits by the group of key customers, but that actual basket size (or amount of goods purchased) remained relatively the same if those customers could be lured back to the store. "The limited impact on overall basket size suggests retailers would benefit from focusing on specific sales and marketing tactics that bring these customer back into their store," said Singh.

Beyond weekly circular specials or in-store events, other tactics could include select competitive pricing on key items that draw defectors to Wal-Mart—even at the risk of cutting into individual product margins—in order to drive store traffic. Because these customers return with comparable purchase levels, they will help mitigate or overcome the overall volume of sales that was lost.

According to Singh, many small businesses assume they are doomed when a big box competitor comes to town. But because new mega-store openings are usually known in advance, local retailers can use existing data to identify likely defectors and take pre-emptive action.

"In many cases, local retailers already possess the information they need to be potent competitors," said Singh. "The challenge is to figure out how to best use this data to improve performance and compete effectively."

The study, "Impact of Wal-Mart Supercenter on a Traditional Supermarket," will appear in a forthcoming edition of Marketing Science and was co-authored by Karsten T. Hansen and Robert C. Blattberg of the Kellogg School of Management at Northwestern University.

Founded in 1949, the Tepper School of Business at Carnegie Mellon is a pioneer in the field of management science and analytical decision making. The school's notable distinctions include a unique contribution to the intellectual community including six Nobel Prizes in economics and a consistent presence in the top tier of business school rankings including being named the No. 2 business school in the United States by The Wall Street Journal.